Sept. 12 (Bloomberg) -- Morgan Stanley and Citigroup Inc.
executives held unsuccessful talks since August in a final push
to settle a dispute over the value of their jointly owned
brokerage, people with direct knowledge of the matter said.

An independent appraiser’s report, delivered late on Sept.
10, and a phone call from Morgan Stanley Chief Executive Officer
James Gorman to Citigroup CEO Vikram Pandit helped settle the
matter within hours.

The overnight effort yielded an agreement for Morgan
Stanley to buy the rest of Morgan Stanley Smith Barney in pieces
through 2015 at a fixed valuation of $13.5 billion. The accord
avoided repeated fights in future years over what the unit is
worth and helped Citigroup lock in a price higher than the
appraisal. The decision also forced Citigroup to take a $4.7
billion writedown on its investment in the business.

“It’s pretty clear who the winner and loser was,” said
David Trone, a JMP Securities LLC analyst who has a market
underperform rating on both firms. “Morgan Stanley positioned
itself very well in this transaction from the start.”

Perella Weinberg Partners LP, the New York-based investment
bank hired to provide the appraisal, set off the flurry of talks
by delivering a valuation below $13.5 billion, people with
direct knowledge of the matter said. The figure was so low --
closer to Morgan Stanley’s $9 billion estimate than Citigroup’s
$22 billion -- that it triggered a contractual clause further
depressing the price on a 14 percent piece of the business.

Gorman, 54, and Pandit, 55, said in statements that the
deal provides “certainty” for investors, assuring them of the
price and timing for the sale of Citigroup’s remaining stake.
“The more we put the past behind us, the more we can focus on
our future,” Pandit said.

Talks Expanded

Morgan Stanley climbed 3.9 percent to $17.25 yesterday in
New York. Citigroup advanced 2.6 percent to $32.66. Spokesmen
for the New York-based banks said they couldn’t comment.

The venture was formed in early 2009 when Citigroup sold
Morgan Stanley a majority stake in its Smith Barney brokerage.
At the time, Citigroup sought to raise capital after its $45
billion U.S. bailout. Morgan Stanley got a 51 percent stake in
the venture and the right to buy the rest over time. The deal
generated a $9.5 billion pretax gain for Citigroup.

“At the time it was struck, Morgan Stanley held all the
cards and got itself in a very savvy position,” Trone said.

Independent Appraiser

Morgan Stanley said in May it would exercise an option to
buy the 14 percent piece, increasing its stake to 65 percent.
The banks’ agreement required them to hire an independent
appraiser, and they chose Perella Weinberg in July.

Perella Weinberg bankers Peter Weinberg and Gary Barancik
presided over a series of meetings in August with executives
from the two banks, hearing out both sides on arguments over
matters including the potential value of future tax benefits and
the amount of preferred stock in the venture’s capital
structure, one person said.

Complicating the task was the lack of publicly traded
companies comparable to Morgan Stanley Smith Barney, the person
said. Publicly traded brokerages such as Stifel Financial Corp.
and Raymond James Financial Inc. are significantly smaller.

Perella Weinberg sought to keep most meetings open to both
sides to provide them with opportunities to rebut arguments
while reducing the likelihood of any complaints that the process
was unfair, one person said.

More Time

The banks tried to bridge their differences during talks in
the weeks before Perella Weinberg’s Aug. 30 deadline for
submitting its appraisal, according to three of the people, who
declined to be identified because the negotiations were private.

Toward the end of the month, Citigroup and Morgan Stanley
asked Perella Weinberg to delay the report to give them more
time to reach a settlement, two people said. One of the banks
wanted more time to provide additional supporting details to
Perella Weinberg, another person said.

The firms announced in an Aug. 28 press release that
Perella Weinberg would delay the appraisal until Sept. 10.

While the discussions initially were geared toward
determining the price Morgan Stanley would pay for the 14
percent stake, the sides soon began discussing a price for
Citigroup’s entire 49 percent holding, one person said.

Citigroup executives moved to lock in a fixed price for its
entire stake partly because they were concerned that the
business was deteriorating under Morgan Stanley’s management,
two people said.

Gorman’s Call

The banks failed to reconcile their differences as talks
continued last week, the people said. With no deal in place by
the Sept. 10 deadline, Perella Weinberg e-mailed its appraisal
to the firms minutes after the 4 p.m. close of U.S. stock
markets in New York. At about 5:30 p.m., Gorman called Pandit to
initiate a new round of talks, one person said.

Investment bankers for both sides met at Morgan Stanley
headquarters about 7 p.m. to work out a deal, one person said.

Morgan Stanley’s contingent was led by Gorman and mergers
chief Robert Kindler, supported by Gary Shedlin, a former
Citigroup investment banker, the people said. They squared off
with Citigroup securities-division Chairman Edward “Ned”
Kelly, who was backed up by investment bankers including David
Head, the person said.

Pandit monitored the talks from Citigroup headquarters on
Park Avenue, one person said.

Perella Weinberg’s valuation strengthened Morgan Stanley’s
hand during the final negotiations, another person said. The
basic terms of a deal were hashed out within hours and handed
off to lawyers, clearing the way for a press release three
minutes after U.S. markets opened yesterday, that person said.

Morgan Stanley has to buy an additional 15 percent stake by
June 2013, according to the statement. Morgan Stanley has an
option to buy the rest of the brokerage earlier than 2015,
subject to regulatory approval. The firm may buy the remaining
35 percent as soon as next year, Howard Chen, a Credit Suisse
Group AG analyst, wrote in a note to clients yesterday.